Smoot-Hawley Tariff Act

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Willis C. Hawley (left) and Reed Smoot in April 1929, shortly before the Smoot-Hawley Tariff Act passed the House of Representatives.

The Smoot-Hawley Tariff Act (sometimes known as the Hawley-Smoot Tariff Act)^[1] was an act signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels. In the United States 1,028 economists signed a petition against this legislation, and after it was passed, many countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half. In the opinion of most economists, the Smoot-Hawley Act was a catalyst for the severe reduction in U.S.-European trade from its high in 1929 to its depressed levels of 1932 that accompanied the start of the Great Depression.^[2][3]

[edit] Causes

Although rated capacity had increased tremendously, actual output, income, and expenditure had not. Under the direction of Republican Senator Reed Smoot of Utah, the party had drafted the Fordney-McCumber tariff act in 1922 which increased tariffs with an eye to increasing domestic firms' market share. Weakening labor markets in 1927 and 1928 prompted Smoot to propose yet another round of tariff hikes. In his memoirs, Smoot made it clear:

"The world is paying for its ruthless destruction of life and property in the World War and for its failure to adjust purchasing power to productive capacity during the industrial revolution of the decade following the war."^[4]

[edit] Sponsors and legislative history

The act was pioneered by Senator Reed Smoot, a Republican from Utah, and Representative Willis C. Hawley, a Republican from Oregon.

When running for president in 1928, one of Herbert Hoover's many campaign promises to help beleaguered farmers had been to raise tariff levels on agricultural products. Hoover won, and Republicans obtained comfortable majorities in the House and in the Senate in 1928. Hoover then asked Congress for an increase in tariff rates on agricultural goods and a downward revision in rates on industrial goods.

The House passed a version of the act in May 1929, raising tariffs on agricultural and industrial goods alike. The Senate debated its bill until March 1930, with many Senators trading votes based on their states' industries. The conference committee then aligned the two versions, largely by moving to the higher House tariffs.^[5]

[edit] Opponents

In May 1930, a petition was signed by 1028 economists in the United States asking President Herbert Hoover to veto the legislation, organized by Paul Douglas, Irving Fisher, James TFG Wood, Frank Graham, Ernest Patterson, Henry Seager, Frank Taussig, and Clair Wilcox.^[6][7] Automobile executive Henry Ford spent an evening at the White House trying to convince Hoover to veto the bill, calling it "an economic stupidity".^[8] J. P. Morgan's chief executive Thomas W. Lamont said he "almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff."^[9]

Hoover opposed the bill and called it "vicious, extortionate, and obnoxious" because he felt it would undermine the commitment he had pledged to international cooperation. (Hoover was right. The international community levied their own tariffs in response after the bill had become law.) However, in the end, Hoover bowed to pressure from his own party and business leaders and signed the bill. ^[10]

Franklin D. Roosevelt spoke against the act while campaigning for president in 1932.^[5]

[edit] Retaliation

Retaliation began long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to raise rates against American products, even though rates could be moved up or down in the Senate or by the conference committee. By September 1929, Hoover's administration had received protest notes from 23 trading partners, but threats of retalitory actions were ignored.^[5]

In May 1930, the biggest trading partner Canada preemptively imposed new tariffs on 16 products that altogether accounted for around 30% of U.S. exports to Canada.^[11] Canada later also forged closer economic links with the British Commonwealth. France and Britain protested and developed new trade avenues. Germany developed a system of autarky.

Both Reed Smoot and Willis Hawley were defeated for reelection in 1932, the controversial tariff being a major factor in their respective losses.

[edit] Economic effects

At first the tariff appeared to be a success. According to historian Robert Sobel, "Factory payrolls, construction contracts, and industrial production all increased sharply." However, larger economic problems loomed in the guise of weak banks. When the Kredit-Anstalt Bank of Austria failed, the global shortcomings of the Smoot-Hawley Tariff reared its head.^[12]

U.S. Imports plunged 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports fell 61% from US$5.4 billion to US$2.1 billion, both drops far more than the 50% fall in the GDP.

According to government statistics, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934.^[13]

There is no universal agreement about the effect of the tariff. According to the U.S. Statistical Abstract, the effective tariff rate was 13.5% in 1929 and 19.8% in 1933 with 63% of all imports being duty-free. From 1821 through 1900 the United States averaged 29.7% effective tariff rates and peaked in 1830 at 57.3% with only 8% of all imports being duty-free, dwarfing the Smoot-Hawley rate. In addition, imports in 1929 were only 4.2% of the United States' GNP and exports were only 5.0%. Smoot-Hawley's effect on the entire U.S. economy may have been small, compared to the monetary policy of the Federal Reserve System. By 1937 the effective tariff rate was reduced to 15.6% when the reaction of 1937-1938 occurred, demonstrating no statistical correlation between this economic downturn and tariff levels. Senator Robert L. Owen testified at the hearings on HR 7230, the bill to make the Federal Reserve banks a national property, that; "In 1937, when the Federal Reserve Board called upon the banks to raise their reserves to twice what they had been before, there was a contraction of credit of two billion dollars.^[14]

Using panel data estimates of export and import equations for 17 countries, Jakob B. Madsen (2002) estimated the effects of increasing tariff and non-tariff trade barriers on worldwide trade during the period 1929–1932. He concluded that real international trade contracted somewhere around 33% overall. His estimates of the impact of various factors included about 14% because of declining GNP in each country, 8% because of increases in tariff rates, 5% because of deflation-induced tariff increases, and 6% because of the imposition of nontariff barriers.

The Smoot-Hawley Tariff Act "imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the United States", quadrupling previous tariff rates.

Although the tariff act was passed after the stock-market crash of 1929, some economic historians consider the political discussion leading up to the passing of the act a factor in causing the crash, the recession that began in late 1929, or both, and its eventual passage a factor in deepening the Great Depression.^[15] Unemployment was at 7.8% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933.^[16]

[edit] End of the tariffs

As a result of the Smoot-Hawley Tariff and other countries' responses to it, the world after World War II saw a push towards multilateral trading agreements that would prevent a similar situation from unfolding. This led to the Bretton Woods Agreement, in 1944, a great lessening of global tariffs starting in December 1945, and the General Agreement on Tariffs and Trade, in the 1950s.^[17]

However, the American Tariff League Study of 1951 which compared the effective tariff levels of 43 countries found that only seven countries had a lower tariff level than the United States (5.1%). 11 countries had effective tariff rates higher than the Smoot-Hawley peak of 19.8% including the United Kingdom (25.6%). The 43 country average was 14.4% - 0.9% higher than the U.S. level of 1929.

In addition to tariffs, many countries implemented non-tariff barriers to protect their industries in the aftermath of World War II after experiencing the dangers of dependence on imports for vital supplies brought upon by free trade policies. Many nations felt the ill effects of embargoes, naval blockades and submarine warfare upon their national security. An example of this involved Britain and France importing all of their watches and clocks from Switzerland and Germany prior to World War II. They discovered that the lack of a watch industry was a great handicap in building defense equipment during the war. Both nations determined never to be without a watch industry again and placed embargoes on watch imports after World War II.^[18]

Non-tariff barriers would become more important in the post-WW II reconstruction period. Japan for example, with an effective tariff rate of 1.6% in 1951 would put many non-tariff barriers in place. In June 1952 Japan's "Basic Policy for the Introduction of Foreign Investment into Japan's Passenger Car Industry" placed quotas, tariffs and commodity taxes on imports that closed the Japanese automobile market to American manufacturers for nearly two decades.^[19]Japan would also make extensive use of licensing agreements which would transfer foreign technology to Japan in exchange for limited market access as in the case of the U.S. television industry. With Japan's home market protected, Japanese manufacturers could make large profits at home to off-set the cost of selling their goods at reduced prices in foreign markets (dumping).

[edit] Presence in modern political dialogue

In the discussion leading up to the passage of the North American Free Trade Agreement (NAFTA) then Vice-President Al Gore mentioned the tariff as a response to NAFTA objections voiced by Ross Perot during a debate in 1993 they had on the Larry King Show. He gave Perot a framed picture of Smoot and Hawley shaking hands after its passage.^[5]

[edit] In popular culture

In the 1986 film Ferris Bueller's Day Off, the economics teacher, played by Ben Stein (whose father, Herbert Stein, was an economics professor and economic advisor to the U.S. government), is seen teaching his class about the Hawley-Smoot Tariff Act.

In comedian Dave Barry's tongue-in-cheek American history book, Dave Barry Slept Here: A Sort of History of the United States, he repeatedly mentions the Hawley-Smoot Tariff throughout the book, not for its historical merit but merely as a humorous phrase. He continues to reference it, occasionally with fake subtlety (e.g., "The H*****-S**** T*****") long after he believes the reader no longer finds it funny.

[edit] See also

• International trade
• Protectionism

[edit] References

[edit] Bibliography

• Archibald, Robert B.; Feldman, David H. (1998). "Investment During the Great Depression: Uncertainty and the Role of the Smoot-Hawley Tariff". Southern Economic Journal 64 (4): 857–879. doi:10.2307/1061208. 
• Beaudreau, Bernard C. (2005). Making Sense of Smoot-Hawley: Tariffs and Technology. New York: iUniverse. 
• Buchanan, Patrick J. (1998). The Great Betrayal: How American Sovereignty and Social Justice Are Being Sacrificed to the Gods of the Global Economy. Boston: Little ↦ Brown. ISBN 0316115185. 
• Crucini, Mario J. (1994). "Sources of variation in real tariff rates: The United States 1900 to 1940". American Economic Review 84 (3): 346–353. doi:10.2307/2118081 (inactive 2009-04-03). 
• Crucini, Mario J.; Kahn, James (1996). "Tariffs and Aggregate Economic Activity: Lessons from the Great Depression". Journal of Monetary Economics 38 (3): 427–467. doi:10.1016/S0304-3932(96)01298-6. 
• Eckes, Alfred (1995). Opening America's Market: U.S. Foreign Trade Policy since 1776. Chapel Hill: University of North Carolina Press. ISBN 0585029059. 
• Eichengreen, Barry (1989). "The Political Economy of the Smoot-Hawley Tariff". Research in Economic History 12: 1–43. 
• Irwin, Douglas (1998). "The Smoot-Hawley Tariff: A Quantitative Assessment". Review of Economics and Statistics 80 (2): 326–334. 
• Kaplan, Edward S. (1996). American Trade Policy: 1923-1995. London: Greenwood Press. ISBN 0313294801. 
• Madsen, Jakob B. (2001). "Trade Barriers and the Collapse of World Trade during the Great Depression". Southern Economic Journal 67 (4): 848–868. doi:10.2307/1061574. 
• McDonald, Judith; O'Brien, Anthony Patrick; Callahan, Colleen (1997). "Trade Wars: Canada's Reaction to the Smoot-Hawley Tariff". Journal of Economic History 57 (4): 802–826. doi:10.2307/2951161. 
• Merill, Milton (1990). Reed Smoot: Apostle in Politics. Logan, UT: Utah State Press. ISBN 0874211271. 
• O'Brien, Anthony. "Smoot-Hawley Tariff". EH Encyclopedia. http://www.eh.net/encyclopedia/article/obrien.hawley-smoot.tariff. 
• Pastor, Robert (1980). Congress and the Politics of U.S. Foreign Economic Policy, 1929–1976. Berkeley: University of California Press. ISBN 0520039041. 
• Schattschneider, E. E. (1935). Politics, Pressures and the Tariff. New York: Prentice-Hall.  → Classic study of passage of Hawley-Smoot tariff
• Taussig, F. W. (1931). The Tariff History of the United States (8th ed.). New York: G.P. Putnam's Sons. http://www.mises.org/etexts/taussig.pdf. 
• Temin, Peter (1989). Lessons from the Great Depression. Cambridge, MA: MIT Press. ISBN 0262200732. 
• Turney, Elaine C. Prange; Northrup, Cynthia Clark (2003). Tariffs and Trade in U.S. History: An Encyclopedia. 

[edit] External links

• 19 U.S.C. § 1202–1681—The text of the law as it still stands (United States Code, Title 19, Chapter 4)
• Article on the Smoot-Hawley Tariff from EH.NET's Encyclopedia by economic historian Anthony O'Brien
• Smoot-Hawley Tariff page on the United States Department of State website
• Opinion on the role of the Tariff in the Great Depression from the National Center for Policy Analysis